Appendix: Government response
Introduction
The Government welcomes the opportunity to address
the issues raised in this constructive report. The wide ranging
and substantial number of recommendations have been considered
very carefully.
The Government's Higher Education reforms, following
Lord Browne's independent review of higher education funding and
student finance, have delivered a fundamental shift in the balance
of funding, between state and student. The Government has developed
a system that maintains the principle that higher education is
free at the point of entry but ensures a flow of funding to institutions
to sustain high quality learning. The Coalition is committed to
delivering a university sector that is more responsive to the
needs of students; which can continue to compete internationally
and which is based on a progressive graduate contribution system.
Young people have not been deterred from Higher Education
as a result of increased tuition fees. Access is based on ability
to learn rather than ability to pay. Students continue to recognise
the lifelong value of higher education. In 2014/15 higher education
application rates for 18 year olds are at an all-time high, as
are applications from disadvantaged students. In further developing
the student loan system the Government has taken into account
some of the Committee's recommendations and those from the National
Audit Office (NAO) Student Loans Repayments Report from November
2013 and will continually improve the modelling and forecasting
for student loans. Our reforms are fair for students, fair for
borrowers and affordable for the nation.
Recommendations and Conclusions
FORECASTING IMPLICATIONS OF THE RAB CHARGE
Recommendation 1: The evidence that we have
received, both in this inquiry and previous inquiries, suggests
that there has been a persistent miscalculation of the Department's
estimates of the RAB charge. The resulting holes in the budget
are only just beginning to materialise. Forecasters, particularly
HEPI, had and continue to have a more accurate picture of repayments.
Despite this, the Department has ignored their concerns. We recommend
that, as a matter of urgency, the Department conducts a full review
of all the financial assumptions underpinning the Department's
RAB model. (Paragraph 17)
As a result of the recommendations of the Committee
and the National Audit Office, we have updated the model for student
loan repayments and the new model has been reviewed both internally
and by the NAO as part of the process for producing the BIS accounts.
We have taken the concerns of the sector into account when producing
these new models. Forecasters such as the IFS have conducted independent
analysis and produced results that are broadly in line with those
of the Department. In order to make the process more transparent,
we have published a simplified version of the new loan repayment
model on the GOV.UK website.
BUDGETARY IMPLICATIONS OF THE RAB CHARGE
Recommendation 2: We support the Chief Secretary
to the Treasury's ambition of improving the incentives for managing
the long term costs of new student loans, and encourage the Treasury
to look for further ways to strengthen these incentives. However,
we are concerned that the current arrangements may have an adverse
impact on unrelated BIS budgets in the medium term. (Paragraph
21)
The Government's reforms have enabled a fundamental
shift, by ensuring the funding of higher education is a shared
endeavour between state and student. There is more funding flowing
into the higher education sector and this is enabling universities
to remain world class and provide a better student experience.
The Resource Accounting and Budgeting (RAB) charge is the estimated
cost to Government of borrowing to support the student finance
system based on future loan write-offs and interest subsidies
in net present value terms. For convenience, we express these
costs in percentage terms as proportion of the initial loan outlay.
The RAB charge is calculated by taking repayment forecasts and
discounting them back to the period that the loan is issued using
the discount rate provided by Treasury (RPI+2.2%). This gives
us a net present value (NPV) of the future repayments and the
cost is the difference between the loan issued and the NPV of
the repayments. We are working with an estimate of the cost of
borrowing to Government which we currently expect to be around
45%. It is important to recognise that any estimate of the RAB
charge is likely to fluctuate as it is highly dependent on macroeconomic
circumstances and the growth of graduate earnings over the next
30 or so years in particular. Estimates can and will continue
to change. There is no immediate pressure on the system.
Authority to distribute resources within each voted
budgetary limit in the Parliamentary Supply Estimates is delegated
by Treasury to BIS subject to specific rules set out in Treasury
guidance. The Departmental Board and Sub-Committees will set departmental
priorities and approve any budget transfers accordingly. All departments'
budget provision beyond 2015-2016 will be agreed as part of the
next Spending Review.
The Department for Business Innovation and Skills
(BIS) is placing increased emphasis on the management of repayments
though the creation of a Repayment Strategy Group and working
with the Student Loans Company (SLC) and Her Majesty's Revenue
and Customs (HMRC) in agreeing a Joint Repayment Strategy. This
will further target losses and focus on performance improvement
to maximise repayment yield and improve efficiencies
Recommendation 3: In order to improve transparency
and accountability, we recommend that the Department publishes
HM Treasury's targets for impairments for student loans alongside
reports against actual performance. (Paragraph 22)
We accept the recommendation of the Committee that
we should endeavour to be as transparent and accountable as possible
when reporting on BIS budgets.
The department will continue to report the impact
of loan impairments across DEL (Departmental Expenditure Limit)
and AME (Annually Managed Expenditure) budgets in the Departmental
Annual Report and Accounts, in accordance with the Chief Secretary
of the Treasury's requirements. The Treasury target provides a
baseline for the Department to measure student loan costs. The
DEL budget impact of these changes was considered immaterial for
reporting purposes in 2013-14 but will be kept under review to
ensure transparency and accountability purposes.
MONITORING AND REPORTING OF THE STUDENT LOANS COMPANY
AGAINST TARGETS
Recommendation 4: For the NAO to conclude that
the targets set for the Student Loans Company by the Department
may have been misleading is a damning finding. It is obvious to
us that the Department must address this as a matter of urgency.
(Paragraph 26)
We accept that the targets could be improved. BIS
has already taken on board both National Audit Office (NAO) and
Public Accounts Committee (PAC) comments and, working with Student
Loans Company (SLC), has reviewed and revised SLC's targets as
part of the Company's Annual Performance and Resource Agreement
(APRA), and Memorandum of Understanding (MOU). New targets have
been set for 2014/15 to make them more specific, and we are working
on targets for 2015-16. New metrics for 2015/16 are under development.
TARGETING REPAYMENTS
Recommendation 5: The NAO has highlighted under-performance
in terms of the collection of loans and the need for an annual
target of money collected in a year together with an explanation
of any variance. We support that recommendation and look to the
Department to set clear targets for the SLC as a matter of urgency
and to publish the earnings and collection assumptions behind
those targets. (Paragraph 30)
Accepted in part. We agree with the NAO and the
Committee that it would be helpful to publish further information
about the collection of student loans.
BIS will in future publish clear and easily understood
annual forecasts of the amounts it expects to collect along with
data on the actual amounts collected. The Department will explain
any variances between the forecasts and the actual amounts collected.
It is important to note that it is not possible to set targets
for annual cash collection because student loan repayments are
contingent on borrower income (which varies in line with the economy)
and collection is through the taxation system at 9% over the repayment
threshold. Therefore the SLC is unable to influence repayment
amounts. However both the Government and the SLC are actively
working to identify solutions to improve collection rates where
borrowers are identified who should be repaying their debt, but
aren't.
BORROWERS NOW LIVING OVERSEAS
Recommendation 6: The Government is finding
it harder to collect from debtors who have moved abroad and the
complicated structure of income-contingent loans adds to that
difficulty. We therefore recommend that the Government assesses
whether converting income contingent debt to mortgage-style debt
for borrowers leaving the country would aid collection of outstanding
student loans. (Paragraph 41)
The current process for borrowers who have moved
overseas already has a number of features in common with the Mortgage-style
arrangement;
· Borrowers
repay debt directly to SLC rather than through the tax system.
· Borrowers only
repay once their earnings reach a specified threshold.
· Repayments
are made monthly to spread the collection over time.
The system of collection reflects relative differences
in incomes and costs of living in different countries. When a
borrower notifies the SLC that they are moving overseas their
income is assessed against the repayment threshold for the country
that they will be working in. A system of banded thresholds is
used for borrowers who move overseas, using price level indices
calculated by the World Bank, and updated annually. This
takes account of the level of affordability in different countries
and means that repayment will remain based on ability to pay,
wherever the borrower lives. These arrangements are necessary
to ensure that borrowers are treated equitably regardless of where
they reside.
Debt recovery only becomes difficult when borrowers
move overseas without either informing the SLC or establishing
a repayment schedule. The introduction of a fully-fledged mortgage
style system for those moving overseas would not make it easier
to recover loans if the borrower actively evades entering repayment
arrangements. We are investigating options to make repayment even
easier for those overseas, and have funded a pilot project to
extend the use of Debt Collection processes overseas for those
seeking to evade their responsibility. If this pilot is deemed
successful, and cost effective, then BIS will consider allocating
additional resources needed to roll out wider debt collection
processes. We are also in discussion with several countries
to develop mutual processes for identifying overseas nationals
who are not making the Higher Education loan repayments which
are due. This is further covered under recommendation 8.
ABSENCE OF INFORMATION
Recommendation 7: It is clear from our evidence
and that of the Committee of Public Accounts that the overall
approach to collecting student debt lacks rigour. It is the case
that the SLC is required to meet targets set by the Department
and it is true that the SLC has met most of these targets. However,
we conclude that the SLC's targets are not fit for purpose and
need urgent review. (Paragraph 46)
A new Repayment Strategy Sub-Group has been set up,
with membership from BIS, the SLC, Her Majesty's Revenue and Customs
and the Devolved Administrations to draw up and oversee a Joint
Repayment Strategy. This group will take action to ensure the
Department meets the NAO/PAC recommendations, as well as improve
overall coordination of loan repayment activity.
INTERNATIONAL COMPARISONS
Recommendation 8: It is regrettable that the
Government did not do more to learn from examples of best practice
overseas. The Government should examine examples of good practice
overseas, including in the United States of America, in order
to assess whether elements could be incorporated into the working
culture of the SLC. (Paragraph 50)
It appears that all countries with student loan systems
face similar problems, and none has completely solved the problem
of borrowers moving overseas and, as a result, avoiding repayment
of their loan. Over 80% of borrowers known to be overseas are
either repaying, or their income is below the relevant repayment
threshold. This shows that the SLC overseas collection system
is working well. That said, we are working hard to strengthen
our arrangements.
The majority of borrowers who are overseas are UK
nationals. They are free to move overseas and we cannot predict
who might do so. There is a clear statement in the student loan
declaration which students sign when applying for a student loan.
It says
I acknowledge and agree that any loan(s) made
to me by the Secretary of State for Business Innovation and Skills,
"the lender" (which includes any persons exercising
functions on behalf of the Secretary of State pursuant to section
23(4) of the Teaching and Higher Education Act 1998 as amended
from time to time or successor legislation, "the Act")
will be on the terms set out in these declarations and in Regulations
which are made under section 22 of the Act as amended from time
to time.
The booklet—A Guide to Terms and Conditions
sets out that where borrowers evade their repayments, SLC have
the right to take legal action to recover the debt. This means
SLC can get a court order to make the borrower repay the total
plus interest and penalties in a single payment. This can be enforced
through the courts as a civil debt whether you're in the UK or
living abroad and the full costs can be passed to the borrower.
EU borrowers are more likely to move overseas, so
SLC takes targeted action to set up repayment schedules for this
group before they leave the UK. SLC does this by contacting
all EU borrowers before they graduate to ensure they have correct
contact details post-graduation and to remind them of their repayment
responsibilities and the process at the cessation of their studies.
We are consistently looking for opportunities to learn from other
Higher Education loan systems overseas and have endeavoured to
ensure that we have engaged with countries with similar systems
to our own. Most recently, BIS has had meetings with officials
from New Zealand in 2013 and 2014, and with officials from Australia
in 2014 to discuss how their student loan schemes operate and
what lessons can be learned. We have agreed to work together in
the future for mutual benefit.
We, together with the SLC, have held discussions
with a number of EU countries to compare schemes. As a result
of these discussions we have found that all those with comparable
loan systems are wrestling with the issue of errant borrowers
who move overseas and seek to evade repayment. A pilot project
is being considered with two EU countries to share reciprocal
data on borrowers who have moved overseas and a separate discussion
is being held to have a similar agreement with Australia.
Whilst we lack statistics on the American system,
it appears that USA has a similar problem with borrowers moving
overseas and not repaying their student loan. However, the US
system is very different to the UK and other EU loan systems so
our current priority will be to further maximise repayments.
We are working with behavioural analysts to see what more can
be done to improve this communication.
REMOVING THE CAP ON THE NUMBERS OF STUDENTS
Recommendation 9: The arrangements for the
efficient collection of the student loan scheme are not working
and the current system of 'debt' and 'repayment' is not being
managed effectively. It is clear that an overhaul of the system
is needed, especially in light of the Minister's assessment that
the level of student debt will increase to approximately £330
billion by 2044. (Paragraph 54)
We disagree with the suggestion that the current
system is not working.
We have designed a student support system which has
at its heart, income contingent loan repayments. It is an important
and deliberate part of the system that only those borrowers who
go on to well-paid jobs will repay their loan or repay in full.
There are no current plans to initiate changes to the income
contingent student loan system in England. The changes that have
been made to the student loan system since 2012 have made it more
sustainable whilst increasing the amount of teaching capital that
universities receive and maintaining the principle of access on
ability to learn, rather than ability to pay.
We will of course continue to monitor the system
in relation to Government affordability.
Recommendation 10: The Student Loans Company
should be fair but robust in fulfilling its duty to achieve value
for money and must demonstrate a strategic shift to a more dynamic
culture in its duties to achieve the best value for the taxpayer
through the most efficient collection of repayments. The Department
should assist with this by realigning the formal targets to demonstrate
this expectation and drive through a change of culture. (Paragraph
55)
We accept the spirit of the Committee's challenge
that the direction of travel set out in the joint BIS/SLC Annual
Performance and Resource Agreement (APRA), and Memorandum of Understanding
(MOU) may need review to invest in and maximise repayment yield.
Work is already underway to ensure that the Partnership is able
to work more dynamically on this front.
We agree that a strategic shift is required to improve
collection rates and work is already underway. BIS, SLC, HMRC
and the Devolved Administrations are working together to develop
a joint approach to drive efficiency gains, increased recovery
of debt and improved borrower satisfaction.
The SLC's 'Transformation Programme' will replace
outdated technology and fundamentally improve on how BIS and SLC
delivers better products and services to its customers. SLC have
refreshed their Repayment Strategy and are in the process of appointing
a new Executive Director responsible for repayment and fraud.
The objective of the revised strategy is to collect every pound
due. This focuses on maximising repayment yield, but also includes
goals for an improved customer experience and achieving internal
SLC efficiencies. The strategy covers the 3 year period 2014-15
to 2016-17.
The Joint Repayment Strategy, linking BIS, Devolved
Administrations, HMRC and SLC activity, includes an objective
to develop improved targets for whole system performance.
Recommendation 11: The United Kingdom is approaching
a tipping point for the financial viability of the student loans
system and the removal of the cap on student numbers will put
even greater pressure on the system. There is a need for an urgent
review of the sustainability of the system. We recommend that,
in its response to this Report, the Government must come back
with a clear timescale for this review. (Paragraph 56)
Lord Browne's Independent Review into Higher Education
Funding and Student Support published in October 2010 recommended
an increase of tuition fees for higher education to ensure the
system had a sufficient stream of income to maintain quality and
remain internationally competitive. A White Paper 'Students at
the Heart of the System' published in June 2011 set the framework
for higher education policy in England. Our universities are now
well-funded and this is driving up the quality of the student
experience and helping to stimulate economic growth.
The Government has no current plans to initiate a
formal review of the sustainability of the student loans system
in England. Indeed the OECD's Director for Education and Skills,
Andreas Schleicher, considers that we are the first European country
to have established a sustainable higher education system.
The Government is committed to supporting the growth
of high quality HE provision in England, ensuring it remains free
at the point of access. The costs of the loan system are based
on projections of graduate repayments over the next 35 years.
These projections were revised in 2013-14 following changes to
the student loan repayments model, but will continue to fluctuate
due to numerous macroeconomic variables, and present no immediate
pressure on the system. This is a long term investment in the
skills of the nation. The new loans system has enabled us to give
more income to HEIs to boost quality of provision during a period
of austerity. What is of key importance is that we have protected
our world class higher education system and we have not deterred
students from participating in HE. The application rate for all
English 18 year olds has increased in 2014 to the highest ever
level (34.8%) and there are a higher proportion of disadvantaged
pupils applying to university than ever before (20.7%). This means
that 18 year olds living in the most disadvantaged areas in England
are nearly twice as likely to apply than they were 10 years ago:
10.7% in 2004 to 20.7% in 2014. We will of course be interested
in the work of the various reviews of higher education funding
including the Universities UK (UUK) Student Funding panel.
HISTORICAL SALE OF THE MORTGAGE-STYLE LOAN-BOOK
Recommendation 12: It is clear that the private
sector can see a profit in collecting student loan debts that
the Government cannot. These findings reinforce our previous conclusions
on the performance of the SLC's debt collection. It also lends
weight to the Minister's ambition for the Student Loans Company
to be removed from this aspect of the student loan system for
mortgage-style loans which may be extended to the income contingent
loans. (Paragraph 64)
Recommendation 13: We recommend that the Department
outlines what rate of repayment it was achieving on the £890
million of mortgage-style loans which have now been sold. This
may then be used as a benchmark to consider the future sales of
income contingent loans. We further recommend that the Minister
sets out the minimum level of performance he expects of the SLC
in pursuing the income-contingent loans before he would consider
moving all debt collection to the private sector. (Paragraph 65)
The sale of the remaining publicly owned mortgage
style student loans in November 2013 achieved good value for money.
By transferring ownership of the student loans, to the private
sector—including their administration and collection—the
SLC has been able to focus on supplying loans to current students
and collecting repayments on newer (income contingent) loans.
The SLC makes repayment data publicly available via its Statistical
First Releases. The published repayment rate (UK wide) for the
remaining publicly owned mortgage style student loans sold in
November 2013 in the three years prior to sale was £80.2m
(2010/11), £67.1m (2011/12) and £50m (2012/13).
The mortgage style student loan portfolio was materially
different to the ICR student loan portfolio - not only with regard
to the terms and conditions of the loans, but also to the collection
mechanism. Whilst SLC collected mortgage style student loan repayments,
the large majority of ICR student loan repayments are now collected
via HMRC. SLC only collects repayments on loans made to overseas
borrowers, and administers early repayments. It would therefore
not be appropriate to use the benchmark suggested. There is also
no plan to transfer administration and collection of the ICR student
loans to the private sector as the tax system is acknowledged
as an efficient and cost effective collection mechanism. The Joint
Repayment Strategy being developed by BIS, Devolved Administrations,
HMRC and SLC will, over time, lead to overall improvements in
collection rates.
TERMS AND CONDITIONS
Recommendation 14: The Minister has been clear
in his public statements that the Department would not change
any of the terms and conditions attached to the loans as a result
of any sale. While it is the case that Ministers will retain the
power to change the terms and conditions, this is not a new provision.
We recommend that there should be no change in the terms and conditions
of existing student loans without parliamentary approval. (Paragraph
69)
This is a deregulatory Government. Legislation is
already in place and Parliament has oversight of any changes that
Ministers plan to make through regulations to terms and conditions
under Section 22 of the 1998 Act and we do not see the need for
unnecessary legislation.
The interest rates for loans are changed annually,
as set out in the relevant loan regulations and apply equally
to sold and unsold loans. These annual changes are part of the
loan conditions as set out in the student loan agreement and do
not constitute an alteration of the loan terms.
PROPOSED SALE OF THE INCOME-CONTINGENT LOAN-BOOK
Recommendation 15: The Government appears to
have committed itself to the sale of the income contingent loans
before it has fully assessed the financial viability of such a
move. Demand for these assets is untested and without the introduction
of a synthetic hedge would only realise around £2 billion
of the £12 billion return expected by Government. While demand
would increase with the introduction of a synthetic hedge, this
would come with an additional long-term cost to Government, which
has yet to be quantified. (Paragraph 78)
We have conducted detailed feasibility work on proposals
for sales of pre-2012 income contingent student loans which suggests
that sales have the potential to realise value for the taxpayer.
However, as confirmed in the 2013 Autumn Statement, the proposed
sales of Government assets, including pre-2012 income contingent
student loans, will be subject to value for money assessments
and this is an explicit objective of any future sale.
The estimated £2bn worth of value that a sale
would achieve if the Government did not provide investors with
protection from the interest cap (via the mechanism of a 'synthetic
hedge') was based on market feedback from 2011. Views of the economy
and future interest rates were considerably different and we therefore
do not believe these views reflect current market sentiment. The
impact on investor demand of not offering such protection may
well now be considerably reduced. Demand and likely value for
money would be confirmed through market testing prior to any sale
being undertaken. Any long term costs associated with the sale
of loans will, alongside the benefits, be reflected in the value
for money assessment undertaken.
Work is on-going to inform a Government's decision
on a potential sale but there are no plans for a sale in this
Parliament.
Recommendation 16: The Government has told
us that it has moved to the sale preparation stage with more up-to-date
analysis underway. This analysis must produce a succinct but penetrative
assessment of the market and we recommend that it be done as a
matter of urgency. Without such an analysis, there is no guarantee
that the Government will make any of the financial returns that
it claims. We further recommend that if the Government proposes
to introduce a 'synthetic hedge' or similar it must share its
scenario testing and specifically publish its estimate of the
best-case and worst-case costing scenarios for this policy. (Paragraph
79)
The Department regularly assesses the markets relevant
to the sale of income contingent loans. However, with no plans
to conduct a sale during this Parliament, it will be necessary
to conduct more up-to-date analysis as recommended by the Committee
to inform an eventual decision on a sale.
As set out above, any long term costs associated
with the sale of loans will, alongside the benefits, be reflected
in the value for money assessment undertaken. Should a decision
be made to proceed with a sale, we would, as per the requirements
of the Sale of the Student Loans Act, provide a report into the
value of a sale to Parliament within three months of sale completion.
LINKING THE STUDENT-LOANS TO THE REMOVAL OF THE CAP
ON STUDENT NUMBERS
Recommendation 17: Given that the Chancellor
of the Exchequer has linked the removal of the student numbers
cap to the sale of the income-contingent loan-book, we seek clarification
from the Department whether the removal of the cap is dependent
on the sale of the loan book. (Paragraph 84)
The removal of the higher education student numbers
cap for high quality providers is not contingent on the sale of
the loan book.
The Government has raised the cap on HE student numbers
to fund up to 30,000 additional places in 2014/15 and will remove
the cap on student numbers altogether in 2015/16,for publicly
funded providers. Funding for this expansion is already agreed
with HMT over the Spending Review period.
The Government's Higher Education funding reforms
are designed to usher in a more diverse provision, more accountable
institutions and more student choice. Going to university
is a life-changing experience and the decision to raise and then
abolish the artificial cap on student numbers will help to close
the opportunity gap. This will support wider access to higher
education, where a clear trend in recent years is that overall
growth in student numbers has seen an increase in the proportion
of students from disadvantaged backgrounds.
Recommendation 18: If the policy is not dependent
on the sale, the Government must set out in its response where
it will raise the £5.55 billion between now and 2018-19 required
to remove the cap without putting an additional burden on the
taxpayer. (Paragraph 85)
The Government believes that lifting the cap on student
numbers is lifting the cap on aspiration. The precise costs of
the policy will depend on the total number of students who take
up places, and the ability of the higher education sector to respond
to demand. This is a fully funded expansion, for which Government
will provide £5.5bn of loan outlay between now and 2018-19.
Decisions on the overall fiscal envelope will be taken at the
next Spending Review
PRESENTATION OF DATA
Recommendation 19: The Government could have
been clearer in the presentation of its figures on the policy
of the loan book-sale and student numbers. We recommend that,
in future, the Government clearly presents the net financial outcome
of any such policy, rather than spreading the figures around different
tables across large official documents. (Paragraph 88)
The Treasury reports the primary fiscal consequences
of policy decisions taken at fiscal events. The 2013 Autumn Statement
tables collate the policy changes that impact different measures;
Public Spending (Table 2.1); and financial transactions impacting
central government Net Cash Requirement (Table 2.5); public spending;
net cash. The OBR's December 2013 Short-term Fiscal Outlook provides
further information on forecast changes expected from both policy
decisions to 2017-18.
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